Determining what is is part
of epistemology, and Thagard and Beam have noted,

Epistemological
theories can be classified into foundational or coherentist.
Foundational theories attempt to ground knowledge in a solid base
such as sense experience [Empiricism] or a priori reasoning
[Realism]. In contrast, coherentists [Pragmatists] argue that there
are no foundations for our beliefs, whose justification derives from
how well they fit together with each other.[Thagard
and Beam, 2004]

Realism argues that there are immutable truths in an ‘intelligible’
universe and a ‘sensible’ universe that is actually experienced.
‘Truth’ transcends experience and can be established only through
abstract thinking (Rationality). Realism, in the Christian and
Islamic traditions, goes back to Plato’s Theory of Forms (or Ideas)
and was central to Descartes and Kant’s philosophy. In this
framework, there is a hierarchy of knowledge with mathematics being
closer to ‘truth’ than experimentation. Greek beliefs in the
immutability and indubitability of mathematics became embedded in
western philosophy with the Neo-Platonists, such as Augustine of
Hippo who associated mathematics to a transcendental deity [Augustine
of Hippo, 1993,
p 46].

Empiricism argues that there are two types of truth: tautologies,
established through formal mathematics or logic; and factual
statements that can be verified by employing the ‘scientific
method’ to guide observation and analysis. A principal of
Empiricism is that while ‘truth’ might be unachievable, the
scientific method will converge towards a close approximation of true
facts. European Empiricism has its roots in Greek Epicureanism and
became dominant in British philosophy through Francis Bacon, John
Locke, David Hume and J. S. Mill. Logical Positivism, a form of
Empiricism, emerged in Vienna in the early twentieth century and
became significant in North America in the 1940s following the
emigration from Nazi Germany of, amongst many others, Hans
Reichenbach and Rudolph Carnap.

The Empiricists rejected the metaphysics of Realism, but generally
did not challenge the status of mathematics and created a special
class of truth related to Hilbert’s Formalism. To appreciate the
distinction between Realism and Empiricism, a Realist might claim
that “2 + 2 = 4 was true at the time of the dinosaurs”, implying
the mathematics is independent of human thought (synthetic a
priori); an Empiricist would claim the statement is a tautology:
2 := 1 + 1, 4 := 1 + 1 + 1 + 1 and so 2 + 2 = (1 + 1) + (1 +
1) = 4 (analytic aposterior).

Within economics, Realism is associated with Neo-classical theories
that employ equilibrium and rationality and resort to ceteris
paribus arguments to explain why economic facts (what is
experienced) rarely conform to Neo-classical theory [Arnold
and Maier-Rigaud, 2012].
Contemporary economics in the ‘Logical positivist’ spirit
includes experimental and behavioural economics (Vernon Smith, Daniel
Kahneman) with the field of neuroeconomics being an emerging exemplar
[Camerer
et al., 2005].

Realism and Empiricism, foundational theories, are both built on the
idea that ‘truth’ is a static relationship to some reality that
is external to the thinker. Pragmatism, on the other hand, argues
that ‘truth’ is just ‘warranted assertability’, what
‘competent, rational enquiry’ produces and it is pointless to try
and identify some ultimate indubitable and immutable ‘Truth’.

For example, Poincaré argued that if the Earth was covered in thick
clouds, so that the stars were never visible, at some point a
Copernicus will “come at last” to argue that

It
is more convenient to suppose the earth turns round, because the laws
of mechanics are thus expressed in much more simple language.
[Poincaré, 1902
(2001), pp 89—91]

and then he goes
on to say

these
two propositions “the earth turns round,” and “it is more
convenient to suppose that the earth turns round,” have one and the
same meaning. [Poincaré, 1902
(2001), p 91]

Pragmatists deal with the contingency of ‘truth’ by adhering to
the principle of ‘fallibilism’, an acceptance that we can be
wrong in our beliefs and we can be justified in being wrong.
Fallibilism is balanced by the principle of ‘experimentalism’;
problems can be resolved by trying out different approaches to their
solution. The process involves discourse, amongst those who might
disagree, so pluralism is admired and ‘Theory’ does not take
precedence over ‘Practice’, as it often does with foundational
approaches. Critical in preventing Pragmatism from becoming an
instrument to attain ends, is that it is not only means that
might change as a result of Pragmatic reflection, but also ends.
([Danisch, 2007]
[Putnam, 2002,
pp 97—134])

Pragmatism emerged in the late nineteenth century with Charles
Peirce, William James and John Dewey and was revived in the 1970s by
Richard Rorty, Hilary Putnam and Robert Brandom. While closely
associated with American philosophy, there have been Pragmatic
strands in French thought, sometimes associated with Greek Sophism,
notably the ‘occasional Pragmatism’ of Henri Poincaré
[Heinzmann, 2010]
and Émile Durkheim acknowledged the usefulness of Pragmatism in
destroying “the cult of truth” [Laufer, 2009],
[Durkheim
and Allcock, 1983,
pp 69-72]. Pragmatism overlaps Empiricism (e.g. Charles W. Morris,
W.V.O. Quine) in its criticism of Realism, and Realism (e.g. C.S.
Peirce, Hilary Putnam) in its criticism of Empiricism [Rorty, 1982,
pp xvi—xvii].

There are two metaphors discussed by Thagard and Beam [Thagard
and Beam, 2004]
that are useful when approaching Pragmatism. Peirce challenged
classical Realism by arguing that ‘reasoning’ was not a chain of
deductions that is reliant on the ‘weakest link’ holding, but
rather a body of knowledge is like a cable with each fibre of the
cable representing a belief: if a fibre fails the cable remains in
place. Otto Neurath challenged Empiricism by presenting a body of
knowledge as a ship and scientists (sailors) must maintain the ship
(revise beliefs) at sea, they do not have the opportunity to
completely rebuild the ship.

Pragmatism does not assign a special status to mathematics, in the
way that Realism and Empiricism do, meaning that mathematics is more
tightly integrated into the approach. This is characterised by the
fact that a number of significant Pragmatists, such as Peirce,
Poincaré and Putnam, were also prominent mathematicians. Putnam
argues that

we
learn what mathematical truth is by learning the practices and
standards of mathematics itself, including the practices of applying
mathematics. [Putnam, 2004,
p 66]

Important
advocates of a what might be described as a Pragmatic approach to
mathematics, challenging both Realism and Formalism and acknowledging
the social nature of mathematics, are Philip Davis, Reuben Hersh
(e.g. [Davis
and Hersh, 1990],
[Hersh, 1998])
and Sal Restivo [Restivo
and Bauchspies, 2006].

Pragmatism is being associated with a revival of ‘classical
economics’ [Martins, 2011],
is close to Pasinetti’s description of the Cambridge School of
Keynesian Economics [Pasinetti, 2005],
relates to Deirdre McCloskey’s economics founded on rhetoric
(discourse) [McCloskey, 2010],
has been linked to behavioural economics [Khalil, 2004]
and institutional economics [Barbalet, 2008].
Pragmatic approaches are distinguished by acknowledging ethical
features of economic behaviour and place a greater emphasis on
uncertainty ([James, 1896
(2009], [Dewey, 2005]).
For example, Friedman’s argument in The Methodology of Positive
Economics appears to share principles of Pragmatism
[Khalil, 2004,
p 2]: “[Positive economics’] performance is to be judged by the
precision, scope, and conformity with experience” [Friedman, 1953,
p 4]. However, Friedman’s rejection of a normative dimension to
economics and a faith in the ability to verify stable economic
theories makes it incompatible with mainstream Pragmatism.

Putnam’s criticises the Fact/Value Dichotomy [Putnam, 2002]
with the observation that when Empiricists insist on the distinction,
they are exclusive in associating values with ethics. Concepts such
as ‘coherence’, ‘plausibility’, ‘simplicity’, and so
forth, are also values and Empiricists implicitly regard these values
as objective, raising the question whether ethical values are also
objective. Central to this observation is the belief that values are
embedded in scientific processes; they are so much part of life that
we cannot avoid them.

Ethical frameworks, in the Western tradition, are usually classed as
being either Deontological, Consequentialist or Virtuous. Deontology
can be typified as “Thou shalt / shalt not” and guides action
on the basis of laws, rule or principles. Since an individual
cannot be subject to a law unless it has been promulgated, Deontology
is linked to with philosophical systems that are based on ‘divine’
or ‘natural’ law, such as Realism and Stoicism [Anscombe, 1958,
p 14]. The practical problem with Deontological Ethics is that basic
rules such as “Thou shalt not kill” have caveats while other
prohibitions become redundant, or need revising, as society evolves.
In the context of contemporary economics, Deontological Ethics has
been employed in financial regulation (Pillars I & II of Basel
II) and has been criticised for being over-bureaucratic and rigid
while susceptible to ‘gaming’, adhering to the letter of the law
but not the spirit. [Van
Staveren, 2007,
pp 23—26]

Consequentialism attempts to judge the value of an action in terms of
its consequences. This approach has its roots in ancient
Chinese Mohism and Greek Epicureanism, developed in opposition to
Platonism and Stoicism. The approach became fully developed in the
nineteenth century with a trio of British philosophers, Bentham, Mill
and Sedgewick, who argued that one should “Act always in such a way
as to promote the greatest happiness to the greatest number”.

On the basis of Consequentialism and David Hume’s distinction of
‘what is’ and ‘what ought to be’, ‘value—neutrality’
was established in economics: since we have ‘objective access’ to
the empirical world’ and are ‘rational beings’, we are able to
calculate the consequences of our economic actions [Wilber
and Hoksbergen, 1986].
A problem with this value-neutrality, described by Robert Heilbroner,
is that it misses the critical fact that

the
objects observed by the social scientist all possess an attribute
that is lacking in the objects of natural universe. This is the
attribute of consciousness — of cognition, of “calculation”, of
volition [Heilbroner, 1973,
p 133]

The importance
of ‘volition’ had been recognised by Oskar Morgenstern, who
objected to perfect foresight based on calculation because

always
there is exhibited an endless chain of reciprocally conjectural
reactions and counter-reactions. This chain can never be broken by an
act of knowledge but always through an arbitrary act — a
resolution. [Mirowski, 1992,
quoting Mogernstern on p 129]

Practically this
means that while we could incorporate the possibility of a Japanese
earthquake into the modelling of asset prices, it would be impossible
to account for the behaviour of Nick Leeson in destroying Barings’
Bank.

As well as questioning the basic ability to predict in an social
context, Consequentialism has been criticised because obviously
immoral acts, such as the execution of the innocent, could be
justified either by the hope of good consequences or the fear of bad
[Anscombe, 1958,
p 14]. In response to these problems, many argue that ethics should
focus on the judgement of the agent taking the action that has
consequences, or Virtue Ethics.

Virtue Ethics, in the European tradition, is associated with
Aristotle, in particular NicomacheanEthics in which
virtues are the “characteristics that enable individuals to live
well in communities” [Pojam, 1998,
p 247]. Aristotle’s ethics do not distinguish reason and emotion,
as Hume did in the eighteenth century, nor do they define absolute
standards, rather Virtue is a consequence of personal reflection [Van
Staveren, 2001,
pp 6—8]. This opens Virtue Ethics to the criticism that it cannot
be codified into a set of rules that any person could apply to
determine ethical action in any situation. However, this criticism
assumes such a reduction is possible, and implicit in this is that
the environment is stable and predictable. The advantage of Virtue
Ethics is precisely that it can accommodate unforeseen circumstances.

However, Virtue Ethics is open to the criticism of Relativism. For
example, Abelard, who was the first western European to highlight the
tripartite classification of ethics in Dialogue of thePhilosopher with the Jew and the Christian, was condemned as a
heretic on the basis that he argued that those who were responsible
for the crucifixion of Jesus Christ were not necessarily doing wrong
if they believed they were fulfilling their social obligations
[Luscombe, 1997,
p 53].

Medieval Scholars approached Virtue Ethics using the same framework
that they used to study physics or medicine, by blending elements, or
humours, in the right manner. They identified seven elements of
morality, the four ‘Cardinal’ virtues; Courage; Justice;
Temperance; and Prudence, and three, so-called, ‘Christian’
virtues: Faith; Hope; and Charity. For example, blending (tempering)
Justice, Courage and Faith result in honesty [McCloskey, 2007,
p 361]. An ethical life was one that exhibited all, not just some, of
the virtues and anyone, priest prince or merchant, was virtuous
providing they got the balance right.

While Virtue Ethics is often associated with Catholicism, all seven
virtues, including Faith, Hope and Charity, existed in pre-Christian
Greek and Roman philosophy, which influenced both Judaic and Islamic
thought. Chinese and Indian philosophy both have their own versions
of Virtue Ethics that can be mapped onto the Catholic framework.
Particularly relevant is the first century Mahayana Buddhist
Vimalakirti Sutra that tells the story of how a virtuous
merchant instructs both kings and monks.

While it is conventional to associate Deontology with Realism and
Consequentialism with Empiricism, it is not so well established to
associate Virtue Ethics with Pragmatism, but there are links.

Aristotle notes that intellectual excellence develops with teaching
while excellence of character [ethike] derives from
‘habituation’ [ěthos] [Broadie
and Rowe, 2011,
1103a15—20]. This can be related to the technical term
‘Pragmatism’, which is derived from the Greek word describing
‘deed, act, affair, matter, business’ [pragma] and both
words are more closely associated with ‘practice’ rather than
‘theory’,

Khalil notes that “true [Pragmatic] inquiry cannot take place in an
ivory tower” [Khalil, 2004,
p 2] and discourse is central to Pragmatism. Putnam admires Jürgen
Habermas’ position on ‘communicative action’. Habermas defines
a ‘norm’ as a “universally valid statement of obligation”,
where as a ‘values’ are culturally specific. The “binding
universal norm” is ‘communicative action’, “norms of
communication governed by the ideal of rational discourse” and the
ideal of rational discourse is governed by

the
norm of sincerity, the norm of truth-telling, and the
norm of asserting only what is rationally warranted †[and]
is contrasted with manipulation. [Putnam, 2002,
pp 113-114]

Putnam goes on
to say

assuming
we have a community of human beings who do regard the ends of others
as important, and who do not assume that there own ends should
override — Habermas’s approach is to assume that disagreement
about what ethical life concretely requires of us is a fact of
life, something that will not go away. [Putnam, 2002,
p 115]

Ethics in
Pragmatism is not dependent on an act or its outcome, but the agent
performing an act which may have unforeseen consequences.

Albert Hirschman has provided a description of four different views
on the relationship between markets and morality: doux-commerce,
self-destruction, feudal-shackles and feudal-benefits
[Hirschman, 1982].

The idea that commerce improved society was prevalent throughout the
eighteenth century. In 1704 technical text on commerce argues
“Commerce attaches [men] to one another through mutual utility”,
while in The Rights of Man (1792) Thomas Paine writes
“[Commerce is a pacific system, operating to cordialise mankind”.
In the intervening years Montesquieu, Hume, Condorcet and Adam Smith
all agreed that commerce was a powerful civilising agent, promoting
honesty, industriousness, probity, punctuality, and frugality, in
contrast to the excesses of absolute monarchies.

Following the Industrial Revolution, these attitudes all but
disappeared and were replaced by views that blamed the collapse of
morality on the influence of capitalism. Commerce was seen as
commodifying human interaction, “custom is replaced by contract”,
and on this basis Romantics saw capitalism as being un-natural,
undermining conservative hierarchies while Marxists believed that the
alienation of the proletariat along with capitalism’s instabilities
would lead to revolution. Others believed that the success of
capitalism, founded on frugality and probity, would eventually be so
great that society would become dissolute, seeking instant
gratification, echoing the rise of Republican Rome and the fall of
Imperial Rome.

Both the doux and self-destructive views of commerce
represented capitalism as a powerful force driving social change.
When capitalism did not collapse, the emphasis changed and capitalism
was not seen as strong but weak: the bourgeoisie were unable to
escape traditional social forces. Marx, while arguing that English
capitalism would destroy itself, also argued that German capitalism
was hindered by antiquated social and political structures. For
Schumpeter, in The Sociology of Imperialisms written during
World War I, Weber’s ‘spirit of capitalism’ was no where in the
warmongering of the age. Schumpeter’s views contrasted to the
optimism of the pre-war sociologists Durkheim and Simmel who both saw
echoes the ties that bound traditional societies in contemporary
commercial relations.

The United States of America, not bound by “feudal—shackles”
seemed to have an advantage over Europe between 1914 and the sixties.
Capitalism, led by America, seemed to rediscover its confidence in
solving society’s problems after the Second World War. But this
confidence was lost with the mass movements of the late sixties and
the subsequent economic malaise of the seventies. The problem had
been foreseen by Louis Hartz in The Liberal Tradition in America
(1955): because America did not have the feudal past of Europe it
did not have social and ideological diversity and so reforms, such as
Roosevelt’s New Deal, were vulnerable to a “tyranny of the
majority”; America missed the feudal—blessings.

The doux-commerce thesis is a powerful argument in favour of
markets yet rarely figures in neo-classical economics and Hirschman
explains this omission by pointing out that the neo-classical program
depends will not accommodate sociological considerations. Hirschman
does acknowledge that economics was changing in the early 1980s, with
the introduction of behavioural economics, in particular results such
as Prisoner’s Dilemma that highlighted the role of co-operation in
economic affairs.

Marion Fourcade and Kieran Healy [Fourcade
and Healy, 2007]
have recently returned to Hirschman’s characterisation and argue
that it is still valid today, but have added a fifth
characterisation: Moralized Markets.

Fourcade and Healy identify four strands of the doux-commerce
thesis in recent scholarship. Deirdre McCloskey argues that
markets nurture “bourgeois virtues” and summarise this view with
the observation that

Commerce
teaches ethics mainly through its communicative dimension, that is,
by promoting conversations among equals and exchange between
strangers. [Fourcade
and Healy, 2007,
p 287]

Seabright and
researchers performing empirical studies on the Ultimatum Game
(introduced the year of Hirschman’s thesis, [Güth
et al., 1982]),
argue that commerce fosters co-operation, particularity amongst
strangers while others support Hayek’s argument that “Capitalism
makes you free”. Finally, some economists look for evidence that
markets are the best motor for innovation. In opposition to these
strands, economists are arguing that instead of virtue we have envy,
instead of co-operation there is coercion, freedom does not equate to
populism and creativity is being stifled by copyright.

While economists seem to focus on the robust nature of markets, able
to create or destroy society, sociologists tend to study the
feebleness of markets. Following Weber, some authors argue that
markets are consequences of cultural legacy, of institutions, or that
Capitalism takes on different forms in different societies. The
Moralized Markets thesis goes further, it characterises markets as
‘cultures’, not simply a consequence of culture, which “are
explicitly moral projects, saturated with normativity.” [Fourcade
and Healy, 2007,
pp 299-300].

Fourcade and Healy identify three strands of the Moralized Markets
thesis. Firstly, there is the view that markets have a role in
creating moral boundaries, as McCloskey argues. This approach follows
Durkheim, who argued that morality is not fixed by some ‘Ontological’
ethical standard (that is, one fixed and derived from a single issue
[Putnam, 2004,
p 19]), rather, morality is defined by the group. This is problematic
in that it is virtually impossible to evaluate the role of markets
neutrally.

The second strand builds on the first by turning to the sociology of
science, where an emphasis is placed on impartiality in evaluating
scientific knowledge (i.e. it studies failures as well as successes).
A key theme in this approach is to study what Michael Callon called
the ‘performativity of markets’, that economic theory drives
economic behaviour, rather than economic theory describes
economic behaviour (in the words of Donald MacKenzie, financial
economics is “An engine not a camera”).

While the second strand focuses on behaviour at the micro level, the
third strand considers economic rules at the macro level and how they
are saturated with normative considerations. For example, when
Friedman made the case for positive economics it was “to make
correct predictions” [Friedman, 1953,
p 4] he ignored the question of what determines ‘correct’, and
this driven by mutable normative values. For example determining
‘correctness’ has changed with the emergence of the value
‘efficiency’ and the decline of ‘social cohesion’.

Gambling is today regarded as profane, but this was not always the
case. For the Greeks, the brothers Zeus, Poseidon and Hades cast lots
to divide up the universe. The Hindus believe the world was a game of
dice played between Shiva and his wife and at the heart of the epic
tale Mahabharata is an, unfair, dice game between the Kauravas
and the Pandavas.([Sahlins, 1972
(2003), p 27], [Brenner
and Brenner, 1990,
p 1—5]). Divination by casting lots played an important role in
Judaism and the Bible refers to the ‘judgement’ of Urim and
Thurim, which scholars today think were two dice ( Exodus
28:30, Leviticus 27:20-21, Samuel I 14:41 see [Brenner
and Brenner, 1990,
p 2]).

Gambling was often associated with sacrificial practises that were
widespread and are generally known by their Native American name,
potlach. Potlach involved the destruction of goods, and seems
to have evolved in nomadic groups because they could not store what
was not needed and gambling was a means avoiding waste by
re-distributing goods before any excess was destroyed. Similar
ceremonies are described in Vedic scriptures ([Keynes, 1936,
pp17-19], [Graeber, 2011,
p 56]).

The role gambling plays in archaic societies has been studied by Jon
Altman and William Mitchell. Altman studied an Australian aboriginal
group around 1980 [Altman, 1985].
The community had access to social security payments and there was
often a surplus left over after essentials had been bought. However,
some individuals were excluded from social security payments by the
government and there was an “inter—household variability in
access to cash”. This variability was seen as a subjective
discrimination within the community by the Australian government and
gambling “acted effectively to both redistribute cash †[and]
provided a means for people with no access income to gain cash”
[Altman, 1985,
pp 60-61]. This was important in non-hierarchical communities because
it meant that one arbitrary bestowal of money was not corrected by
another subjective distribution, such as redistribution by a chief.
William Mitchell has considered the role that gambling plays in
disrupting hierarchical social structures, such as the Indian caste
system, by studying the Wape in New Guinea [Mitchell, 1988].
The conclusion was that the non-hierarchical society of the Wape was
maintained through gambling.

The pervasive nature of gambling in archaic communities, appearing in
the Vedic scriptures, potlach ceremonies, aboriginal Australia and
New Guinea and the Hazda [Sahlins, 1972
(2003), p 27] can be explained because it is an
objective, ‘fair’, mechanism for the redistribution of wealth.
What needs to be recognised is that this process remains valid only
so long as no single entity accumulates enough wealth that it can
bankrupt all the others.

Gambling had been outlawed in the medieval period, usually because
time spent gambling could be better used [Brenner
and Brenner, 1990,
p 58]. However, building on Roman practice, lotteries began to be
used as means of raising public-finance in the later Medieval period.
The first private lottery appeared in the sixteenth century in Italy
and the mechanism spread to France and England [Brenner
et al., 2008,
pp 133—138]. The practice culminated in The Million Adventure
lottery set up by the English government and drawn in November 1694
[Murphy, 2009,
p 34].

The seventeenth century economist, William Petty, observed that
lotteries were “a tax upon unfortunate, self-conceited fools” and
from the start of the eighteenth century gambling became increasingly
associated with “the waste of time and money; the neglect of
familial and business duties; the erosion of social trust; and the
severed link between hard work, talent and gain.” [Daston, 1998,
p 161]. However, by the end of the century ‘gambling’, in the
form of insurance, had become a legitimate practice if based on
rational foundations ([Zelizer, 1979],
[Daston, 1987])
and in 1774 the Life Assurance Act distinguished between legitimate
insurance and illicit gambling and became known as the Gambling Act.

Gabrielle and Reuven Brenner argue that the de-legitimisation of
lotteries, and gambling in general, comes about because during the
seventeenth and eighteenth centuries there was significant social and
economic change. In this environment gambling and speculation
provided the ‘lower classes’ with a means to climb up the social
ladder [Brenner
et al., 2008,
pp 98—104]. While the lotteries enabled this disruptive social
mobility, they were a necessary tool of public finance that prevented
the stagnation and crises suffered by states reliant on taxation
[Nash, 2000].
By the start of the nineteenth century, finance had developed to such
an extent that governments could tax more effectively, notably the
incomes of the middle classes, or to borrow from the middle and upper
classes. The working classes could be excluded from the opportunities
to get rich that participating in public-finance provided.

The prohibitions on gambling had an important impact on the
development of finance. In 1851, following a dispute between two
counterparties in a forward contract, English law established that
there needed to be ‘intent to deliver’ for a derivative to avoid
being classed as an illegitimate gamble [Swan, 1999,
pp 211—213]. While English courts avoided becoming involved in
derivative markets, U.S. courts were much more active in restricting
speculative behaviour and were vigorous in prosecuting “idlers who
made profit even while they slept” [de Goede, 2005,
p 62, quoting Fabian]. One case, brought by the Chicago Board of
Trade (CBOT)against Christie-Street Commission Company, which was
offering its customers bets on the grain futures prices published by
the CBOT, eventually reached the U. S. Supreme Court, who ruled in
1905 that

People
will endeavour to forecast the future, and to make agreements
according to their prophecy. Speculation of this kind by competent
men is the self—adjustment of society to the probable.
[de Goede, 2005,
p 71]

Hirschman presents the ‘Industrial Revolution’ as being the “most
plausible explanation for the eclipse of the doux-commerce thesis”
[Hirschman, 1982,
p 1470]. However, there have been similar societal changes that did
not lead to similar attitudinal changes, raising the question as to
whether there is a more specific explanation to the eclipse of the
doux-commerce thesis.

In 1932 Lionel Robbins defined economics as “the science which
studies human behaviour as a relationship between ends and scarce
means which have alternative uses”. This can be traced back to John
Stuart Mill’s 1836 definition of political economy as being

concerned
with [man] solely as a being who desires to possess wealth, and who
is capable of judging of the comparative efficacy of means for
obtaining that end. [Mill, 1967]

Mill defended
Thomas Malthus’ An Essay on the Principle of Population,
which focused on scarcity, in Principles of Political Economy of
1848. Mill was writing at a time when Europe was struck by the
Cholera pandemic of 1829—1851 and the famines of 1845—1851 and
while Alfred, Lord Tennyson, was describing nature as “red in tooth
and claw”.

Between Mill and Robbins is Alfred Marshall who synthesised Mill’s
approach to economics with Darwinian metaphors of competition
([Backhouse, 1985,
10.1], [Thomas, 1991]).
Malthus, Darwin and Mill all worked in culture infused with a belief
that chance was being defeated and Aristotle’s class of events that
were unpredictable was becoming empty. While contemporary Darwinists
reject the idea that evolution is random [Kiontke
et al.], in the presence of uncertainty economics
becomes an exercise in optimisation, such as of maximising utility.
Even when it is acknowledged that there is uncertainty in the future,
the economic system is assumed to be ergodic, to have stable
parameters, and the economic exercise is one of maximising expected
utility. This is a strong assumption with wide implications
[Feller, 1949,
p 417—418].

A confidence in determinism has been challenged by the Pragmatists
and financial events since the Nixon Shock. In the 26 years between
1945 and autumn 1971, the Bank of England changed its lending rate 41
times, with 30% of these changes occurring between 1966 and 1971. In
the 26 years after 1971, it changed them 216 times. After the
collapse of Bretton—Woods, a key economic factor had gone from
being fairly stable to being a random process. What links
contemporary culture with that before 1700 is the understanding that
uncertainty has to be accommodated. What characterised much of the
nineteenth and twentieth century was a confidence in uncertainty and
a concern for scarcity.

We refine Hirschmann’s explanation that the ‘Industrial
Revolution’ was responsible for the decline in the doux-commerce
thesis by identifying the emergence in a faith in determinism and
certainty coinciding with a concern for scarcity. This is not a new
observation, Moses ben Maimon (Maimonides) argued that God’s
punishment after the Fall of Man was not so much about scarcity but
uncertainty in his Guide for the Perplexed, written in 1190
and an influence on the Scholastics. In the Garden of Eden humans had
perfect knowledge, which was lost with the Fall, and it is the loss
of this knowledge which is at the root of suffering: if we know what
will happen we can manage scarcity [Perlman, 1997].

The relationship between uncertainty and scarcity is a component of
the distinction between legitimate investment and illicit
speculation. In an attempt to understand this moral distinction
Gabrielle and Reuven Brenner identify the three types of market
participant, facing the problems of scarcity and uncertainty.
Investors are preoccupied with scarcity and defer income. Because
uncertainty exposes the investor to the risk of loss, investors wish
to minimise uncertainty at the cost of potential profits. Gamblers
will bet on an outcome taking odds that have been agreed on by
society such as with a sporting bet or in a casino. Gambling is
rational in two circumstances, when the gambler has an excess of
resources and can afford to lose the stake: on course betting for the
rich has never been restricted, or when the gambler is facing certain
ruin/extinction and so they have nothing to lose but much to gain by
taking the gamble. ‘Speculators’ bet on a mis-calculation of the
odds quoted by society and explains why speculators are regarded as
socially questionable: they have opinions that are explicitly at odds
with the consensus, they are practitioners who rebel against a
theoretical ‘Truth’ ([Brenner
and Brenner, 1990,
p 91], [Beunza
and Stark, 2012,
p 394]). This is captured in Arjun Appadurai argument that the
leading agents in modern finance

believe
in their capacity to channel the workings of chance to win in the
games dominated by cultures of control †[they] are not those who
wish to “tame chance” but those who wish to use chance to animate
the otherwise deterministic play of risk [quantifiable uncertainty]”.
[Appadurai, 2011,
p 533-534]

The philosophical antecedents of the modern speculators, betting
against determinism can be found in medieval Franciscans such as
Pierre Jean Olivi and John Duns Scotus. The Dominican, empirical
rationalist, Aquinas argued that knowledge rested on reason and
revelation and so God could be understood by rational examination of
nature. The fideist Scotus argued that this placed
unjustifiable restrictions on God, who could interfere with nature at
will: God, and nature, could be capricious [Luscombe, 1997,
p 127].

Appadurai was motivated to study finance by Marcel Mauss’ essay Le
Don (‘The Gift’), exploring the moral force behind
reciprocity in primitive and archaic societies. The relationship
between fairness, reciprocity and markets has been studied in the
context of the so—called ‘Ultimatum Game’ [Thaler, 1988].
The ‘Golden Rule’ of reciprocity appears to be behaviour learnt
in the social context of market exchange and is fundamental to human
civilisation ([Murnighan
and Saxon, 1998],
[Henrich
et al., 2004],
[Henrich
et al., 2006],
[Jensen
et al., 2007]).

Appadurai notes that the contemporary financial speculator is
“betting on the obligation of return” [Appadurai, 2011,
p 535]. The role of this balanced reciprocity in finance can be seen
as an axiom in that it lays the foundation for subsequent analysis,
it can also be seen as a simplifying assumption: if the future is
uncertain what mechanism ensures that agreements will be honoured.
When Daniel Beunza and David Stark observe, echoing Ramsey, that in
finance “to be opportunistic you must be principled, i.e. you must
commit to an evaluative metric” [Beunza
and Stark, 2004,
p 372], the assumption in reciprocity is part of this evaluative
framework.

David Graeber also recognises the fundamental position reciprocity
has in finance [Graeber, 2011],
but where as Appadurai recognises the importance of reciprocity in
the presence of uncertainty, Graeber essentially ignores this
fundamental issue in his analysis that ends with the conclusion that
“we don’t ‘all’ have to pay our debts” [Graeber, 2011,
p 391]. In advocating that reciprocity need not be honoured, Graeber
is not just challenging contemporary capitalism but also the
foundations of civil society in the Golden Rule, based on equality
and reciprocity [Graafland, 2010,
p 235].

In the presence of uncertainty, society needs reciprocity, if there
is no certainty in what the future holds we need to trust that our
debts, whether physical or metaphysical, are going to be repaid.
Determinism emerged as the dominant scientific principle, initially
with the Augustinian probabilists of the seventeenth century, then
with the post Revolutionary science of Laplace. As life became
predictable, an emphasis of dealing with uncertainty was replaced by
one of dealing with scarcity and the fact/value dichotomy became
embedded into culture.

W. Feller. On the theory of stochastic
processes, with particular reference to applications. In J. Neyman,
editor, Proceedings of the First (1945/46) Berkeley Symposium onMathematical Statistics and Probability, pages 403—432.
University of California Press, 1949.

G. Heinzmann. Henri Poincaré’s and his
thoughts on the philosophy of science. In E. Charpentier,
E. Ghys, and A. Lesne, editors, The Scientific Legacy of
Poincaré. American Mathematical Society / London Mathematical
Society, 2010.

J. S. Mill. On the definition of political
economy; and on the method of investigation proper to it. In J. M.
Robson, editor, The Collected Works of John Stuart Mill, Volume IV- Essays on Economics and Society Part I,. Routledge, 1967.

P. Mirowski. What were von Neumannn and
Morgenstern trying to accomplish?. In E. R. Weintraub, editor,
Toward a History of Game Theory, pages 113—150. Duke
University Press, 1992.

W. E. Mitchell. The defeat of hierarchy:
Gambling as exchange in a Sepik society. American Ethnologist,
15(4):638—657, 1988.

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About Me

I am a Lecturer in Financial Mathematics at Heriot-Watt University in Edinburgh. Heriot-Watt was the first UK university to offer degrees in Actuarial Science and Financial Mathematics and is a leading UK research centre in the fields.

Between 2006-2011 I was the UK Research Council's Academic Fellow in Financial Mathematics and was involved in informing policy makers of mathematical aspects of the Credit Crisis.